183613 Specimen Papers Web Version

8/13/2019 183613 Specimen Papers Web Version

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Edexcel International

London Examinations

GCE Advanced Subsidiary/Advanced Level

Specimen Papers and Mark Schemes

London Examinations Advanced Subsidiary GCE

Accounting (8011)First Examination January 2005

London Examinations Advanced GCE

Accounting (9011)

First Examination May/June 2005


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Contents

Unit 1 Specimen paper 1

Unit 1 Mark scheme 12

Unit 2 Specimen paper 23

Unit 2 Mark scheme 34


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Revised GCE Advanced Subsidiary and Advanced Level Accounting 8011/9011 Specimen Papers and Mark Schemes 1

Paper Reference(s)

8011/9011

London Examinations GCEAccounting

Advanced Subsidiary/Advanced LevelUnit 1 - The accounting system and costing

Specimen Paper

First examination January 2005

Time: 3 hours

Materials required for examination Items included with question papersAnswer Book (AB16) Accounting paper (AB34)

(6 sheets per candidate)

Instructions to Candidates

Answer FIVE questions, choose TWO from Section A and THREE from Section B.

In the boxes on the answer book, write the name of the examining body (London

Examinations), your centre number, candidate number, the subject title (Accounting),

the paper reference (8011/9011), your surname and signature.

Answer your questions in the answer book. Make sure your answers to parts of

questions are clearly numbered. Use additional answer sheets if necessary. If the

accounting paper provided does not allow you to set out your answer in the way you

wish, rule up a page of the answer book to suit your requirements.

Information for Candidates

The total mark for this paper is 100. The marks for parts of questions are shown in

round brackets: e.g. (2).

This paper has 7 questions.

Calculators may be used.

Advice to Candidates

Write your answers neatly and in good English.

This publication may only be reproduced in accordance with London Qualifications copyright policy. 2004


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2 Revised GCE Advanced Subsidiary and Advanced Level Accounting 8011/9011 Specimen Papers and Mark Schemes

SECTION A

Answer TWO questions from this section

1. Eric Morris is a sole trader operating a business with two trading departments, parts

supply and electrical repairs. Parts are supplied through a shop premises and all repairs

are carried out on customers premises. The following trial balance was extracted from

the books as at 30 April 2003:

Dr Cr

Parts sales 186 500

Repair charges to customers 125 000

Purchase of parts 153 500Wages:

Repair staff 48 000

Parts assistants 25 000

Office staff 13 500

Rates, lighting and heating 10 500

Drawings 18 000

Telephone 2 150

General administration 6 650

Sundry expenses 8 800

Premises 50 000

Motor van running expenses 9 000Motor vans at cost 44 000

Motor vans - provision for depreciation 20 000

Fixtures at cost 16 000

Fixtures - provision for depreciation 4 800

Capital 60 000

Debtors 46 500

Creditors 38 300

Stock of parts - 1 May 2002 32 000

8% Loan - Repayable 31 December 2010 50 000

Bank 2 500

Provision for doubtful debts 1 500

486 100 486 100


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The following information is also available:

Stock of parts as at 30 April 2003 was 29 000.

During the year, parts with a cost price of 67 000 were taken from the shop and used on

customers repairs. Provisions for depreciation are to be made annually at the rate of 25% on motor vans, using

the diminishing balance method, and at 10% on the cost of fixtures using the straight line

method.

Half of the fixtures are used in the shop for parts supply and half in the office for generaladministration.

Debtors include 1 500 for a sale of parts to a customer who has been declared bankrupt.This debt cannot be recovered.

The provision for doubtful debts is to be maintained at 4% of debtors.

Mileage records show that the motor vans are used 70% for customer repairs, 10% for the

delivery of parts from the shop and 20% for general business use. General administration expenses were prepaid by 1 000.

An electricity bill for 400 was owing on 30 April 2003.

Required:

(a) Prepare:

(i) the departmental trading and profit and loss accounts, in columnarformat, showing

the departmental profit or loss from both the parts sales and electrical repairs for the

year ended 30 April 2003, together with a statement to calculate the net profit of the

business as a whole;

(ii) the balance sheet of the business as at 30 April 2003.

(20)

(b)

(i) Explain the term depreciation.

(ii) Listfourcauses of depreciation. (6)

(Total 26 marks)


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2. Kaliel Manufacturing produces and retails a single product. The following balances

were extracted from the books at 31 August 2003.

Stocks at 1 September 2002: raw materials See first bullet point below

work in progress 15 000finished goods 30 500

Purchases of raw materials See first bullet point below

Production wages 68 000

Direct expenses 16 000

Salaries: factory management 35 500

administrative management 75 000

Light, heat and power 16 800

Building insurance 30 000

Plant and machinery: cost 90 000

provision for depreciation 60 000

Premises: cost 300 000provision for depreciation 100 000

Sales of finished goods 318 000

The following information is also available:

Raw materials are purchased and issued to production on the First In First Out (F.I.F.O)periodic valuation basis. The following information is available concerning raw materials

for the year 1 September 2002 to 31 August 2003:

Stock 1 September 2002 200 @ 20

100 @ 25

Purchases Batch 1 500 @ 25

Batch 2 1 000 @ 30

Batch 3 500 @ 35

Issues to production Batch 1 800

Batch 2 1 200

Light, heat and power is to be apportioned between manufacturing and administration use

on the basis of 75% manufacturing, 25% administration. Building insurance is to be apportioned on the basis of floor area occupied.

Manufacturing occupies 1 000 sq m and administration 500 sq m.

Depreciation is to be provided annually on plant and machinery at the rate of 30% usingthe diminishing balance method.

Depreciation is to be provided annually on premises at the rate of 2% per annum usingthe straight line method. Depreciation is apportioned on the basis of floor area occupied.

Manufacturing occupies 1 000 sq m and administration 500 sq m.


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3. Huw Jones is a general trader retailing computer equipment. His final accounts for

the previous two years are summarised as follows:

Year ending Year ending

31 July 2002 31 July 2003 000s 000s

Trading and Profit and Loss

Sales 250 400

Cost of sales (150) (260)

Expenses (80) (100)

Profit 20 40

100 140

Balance Sheets as at 31 July 2002 31 July 2003Fixed Assets 100 135

Current Assets

Stock 60 105

Debtors 30 85

Bank 30 5

120 195

Current Liabilities

Creditors (60) (150)

Working Capital 60 45

160 180

Financed by:

Capital 150 160

Profit 20 40

170 200

Drawings (10) (20)

160 180

Required:

(a) Calculate the following ratios for the years ended 31 July 2002 and 31 July 2003:

(i) Gross profit to sales percentage

(ii) Net profit to sales percentage

(iii) Return on capital employed

(iv) Current ratio

(v) Liquid (acid test) ratio.


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Candidates should note:

Capital employed is to be calculated as the average capital employed during the year

All calculations should be to one decimal point

(10)

(b) Using your calculations from (a), for the business comment upon the:

(i) profitability;

(ii) liquidity.

(8)

(c) Huw Jones believes that his accountant has prepared accounts which understate his

net profit and asset values. He believes that the following should be taken into

consideration.

(i) The fixed assets have been depreciated using the diminishing balance method. If

the straight line method were to be used for the next three years the net profit

would be greater. Thereafter, the diminishing balance method would be

reinstated.

(ii) The market value of the freehold premises is now twice that paid when the

property was purchased.The current market value should be substituted for the

current balance sheet value and the increase added to the net profit.

(iii) The greatest asset that the business has is the skill of the staff. Huw proposes to

value the staff skill at 250 000 in the balance sheet.

Discuss the accounting acceptability of the proposals made by Huw Jones, making

reference in your answer to accepted accounting concepts or conventions.

(8)

(Total 26 Marks)

TOTAL FOR SECTION A: 52 MARKS


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SECTION B

Answer THREE questions from this section

4. On 31 July 2003 a business extracted a trial balance which failed to balance. A suspense

account was opened equal to the value of the difference between the debit and credit

totals. At the same date a trading and profit and loss account was prepared which

recorded a net profit of 47 600. Subsequently the following errors were discovered in

the accounts:

(i) The purchase of a motor vehicle for 5 200, had been posted to the purchases

account.

(ii) A sale of goods to D Cross 800, had been entered into the account of

B Crosswell.

(iii) Discount received 300, had been correctly entered in the customers accountsin the sales ledger, but no entry had been made in the discount received

account.

(iv) A purchase of goods from A Smyth for 1 120, had been correctly entered in

the personal account but had been entered into the purchases account as

1 210.

(v) Discount allowed 97, had been credited to the discount allowed account.

(vi) A stocktake sheet showing stock valued at 312, had been counted twice in

valuing the closing stock.

Required:

(a) Explain the difference betweenerrors of commissionanderrors ofprinciple.

(2)(b) Prepare the journal entries for the business correcting the errors above

(Narratives are notrequired).

(9)(c) Prepare a statement showing the adjusted net profit following correction of

the errors.

(5)

(Total 16 Marks)


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5. Abdula operates a building repair business. Customersare charged for building repairs at

the rate of 14 per hour and 0.30 per kilometre to cover the costs of the builders van.

The following cost information is available:

Repair staff salary 16 000Health insurance 8% of salary

Working year 48 weeks x 40 hours

Staff time spent on customers repairs 60%

Mark up on labour cost 10%

Builders van - cost 13 000

asset life 6 years

residual value 1 000

Van maintenance costs 480 per annum

Van insurance and taxes 15 per month

Fuel - usage 8 kilometres per litre

cost 0.60 per litreDistance travelled by motor van per annum 20 000 kilometres

Required:

(a) Calculate:

(i) the cost per labour hour for building repairs;

(ii) the cost per kilometre for using the motor van for building repairs.

(8)

(b) Comment upon the level of the charge made per labour hour for building repairs and

per kilometre for the use of the motor van.

(2)

(c) Abdulas workers are paid an hourly rate.

(i) Explaintwo advantages of paying workers by piecework.

(ii) Comment upon the suitability of piecework for building repair work.

(6)

(Total 16 Marks)


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6. Asif and Brian are business partners sharing profits and losses equally. Interest is paid on

capital at the rate of 5%. Brian is entitled to a salary of 12 000 per annum. After

calculating the net profit for the year ended 31 July 2003 the following balances remained

in the ledger:

Net profit 30 000

Drawings- Asif 14 000

Brian 15 000

Capital Account- Asif 80 000

Brian 60 000

Current Accounts- Asif 2 500 Cr

Brian 500 Dr

On 1 August 2003, Asif and Brian agreed to admit Carole as a partner. At that date

goodwill was valued at 50 000. The following was agreed between the three

partners:

(i) Goodwill would not remain in the books of the new partnership.

(ii) The partners would share profits and losses: two fifths Asif, two fifths Brian,

one fifth Carole.

(iii) Carole would pay 20 000 into the partnership bank account by way of

capital.

Required:

(a) Prepare the appropriation account for Asif and Brian for the year ended

31 July 2003.(3)

(b) Prepare at 1 August 2003 the:

(i) current accounts of Asif and Brian;

(ii) capital accounts of Asif, Brian and Carole.(9)

(c)

(i) Define the term goodwill.

(ii) Explain why businesses generally do not show goodwill in their accounts.

(4)

(Total 16 Marks)


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7. A manufacturing business has three production departments: machining, assemblyand finishing.

The following are the expected expenses for the forthcoming year:

Rent and rates 13 200

Depreciation of machinery 60 000

Supervisors salary 30 000

Machinery insurance 15 000

The following departmental information is available:

Machining Assembly Finishing

Floor area (sq m) 500 300 400

Value of machinery 60 000 24 000 36 000Number of employees 6 6 3

All employees work a 40 hour week for 45 weeks per year.

Required:

(a) Using an example, explain what is meant by the allocationof expenses.

(2)

(b) Apportion the overheads to the departments using the most appropriate basis.

(6)

(c) Calculate the overhead absorption rate for each department, based on direct

labour hours.

(3)

(d)

(i) State the difference betweenproductive andservicedepartments.

(ii) Explain how a business would recover the costs of operating its service

departments overhead absorption rate.

(5)

(Total 16 Marks)

TOTAL FOR SECTION B: 48 MARKS


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Unit 1 Mark scheme (= half mark)

OF(= Own Figure) is a system whereby a candidate misses a mark only once for a mistake. The

mistake is noted where it first occurs and consequential incorrect figures or operations are

awarded full marks as though they were correct.

Question 1

(a) Departmental Trading and Profit and Loss Account for the year ended 30 April 2003

Repairs Sales of

parts

Sales 125 000 186 500

less

Opening stock - 32 000 Purchases - 153 500

Transfer adjustment 67 000 (67 000)

67 000 118 500

Closing stock - 29 000

Cost of sales 67 000 89 500

Wages 48 000 25 000 Motor van depreciation 4 200 600 Motor van running expenses 6 300 900

Fixtures depreciation - 800

Bad debts - 1 500

125 500 118 300

Departmental profit/loss (500) 68 200 125 000 186 500

General Profit and Loss Account

Departmental profit/loss - Repairs (500)

Parts sales 68 200

67 700 Less

Loan interest 4 000 Office staff wages 13 500 Rates, lighting and heating 10 900

Telephone 2 150 General administration 5 650

Sundry expenses 8 800

Motor van depreciation 1 200 Motor van running expenses 1 800

Fixtures depreciation 800 Increase in PBD 300

49 100

Net Profit 18 60067 700


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Balance Sheet as at 30 April 2003

Fixed Assets

Premises 50 000 Motor Vans 44 000 - 26 000 = 18 000

Fixtures 16 000 - 6 400 = 9 600 77 600

Current Assets

Stock 29 000

Debtors 45 000

Less PBD 1 800

43 200 Prepaid 1 000

Bank 2 500 75 700

Less

Current Liabilities

Creditors 38 300 Loan Interest Due 4 000

Accrual 400 42 700

WORKING CAPITAL 33 000

110 600

Liabilities Due In Over One Year

8% Loan - Repayable 31.12.2010 50 000 60 600

Financed By:

Capital 60 000 Plus Net Profit 18 600

78 600

Less Drawings 18 000

60 600

40 x = (20 marks)

(b) Depreciation is the diminution in the value of a fixed asset (1)due to use and or the lapse of

time. (1)

Causes: Wear and tear/ Physical deterioration

Obsolescence

Time factor - patents etc

Depletion - extraction of minerals

(1) x 4 points(6 marks)

(Total 26 marks)


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Question 2

(a) Manufacturing Account for the year ended 31 August 2003

Opening stock of raw materials 6 500 Purchases of raw materials 60 000

66 500

less Closing stock of raw materials 10 500

Cost of Raw Materials Consumed 56 000

Production wages 68 000 Direct expenses 16 000

PRIME COST 140 000

Production overheads:

Salaries 35 500

Light, heat and power 12 600 Building insurance 20 000 Plant depreciation 9 000

Premises depreciation 4 000 81 100

Work in progress 1 Sept 02 15 000

31Aug 03 20 500

(5 500)

COST OF PRODUCTION 215 600

Trading Account for the year ended 31 August 2003

Sales 318 000

Opening stock of finished goods 30 500

Cost of Production 215 600 OF

246 100

less closing stock 27 500

Cost of goods sold 218 600 OF

Gross profit 99 400

318 000

34 x = (17 marks)

(b) Capital expenditure - acquires or enhances a fixed asset (1) which will be utilised and

bring benefit to the organisation for a number of accounting years or periods. (1)

Revenue expenditure - relates to one particular accounting period (1) with no long term

benefit to the expenditure, or enhancement to a fixed asset, (1)beyond the current

accounting period. (4 marks)

(c) In the case of the extension to the building costing 75 000. There will be a long term

benefit and therefore the expenditure will be capitalised. (1)

Depreciation at 2% - 1 500 per annum will be recorded as a production overhead in the manufacturing account. (1)


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In the balance sheet, 75 000 will be added to the value of the building and

depreciation deducted at the rate of 1 500 per annum.(1)

In the case of the roof repair costing 6 000, this will be revenue expenditure. (1)

The total sum of 6 000 will be deducted from the manufacturing or profit and loss

accounts. (1)

(5 marks)

(Total 26 marks)


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Question 3

(a)

31 July 2002 31 July 2003

Gross profit as sales percentage 100 x 100 = 40% 140 x 100 = 35%

250 400

Net profit to sales percentage 20 x 100 = 8% 40 x 100 = 10% 250 400

Return on capital employed 20 x 100 = 12.9% 40 x 100 = 23.5%155 170

Current ratio 120 = 2:1 195 = 1.3:1

60 150

Acid test ratio 120 - 60 = 1:1 195 - 105 = 0.6:1

60 150

20 x = (10 marks)

(b)

(i) Huw Jones has expanded sales during the year by reducing his gross profit

percentage (1)and probably his prices. (1)He has increased his net profit percentage

by controlling costs as a percentage of sales. (1)His net profit for the year has

doubled (1)substantially increasing his return on capital employed which at 23.5%

(1)represents a high return. (1)

(Maximum 4 marks)

(ii) The liquidity of the business has deteriorated over the year. (1)The current ratio is

lower than we would wish to see, but not at a dangerous level yet. (1)This has been

mainly brought about byhigh creditors (1)with little cash available to pay them. (1)

Stock has risen substantially (1)and there appears to be difficulty in collecting debtors

payments. (1)Action needs to be taken to control stock and exercise credit control from

debtors. (1)

(Maximum 4 marks) (8 marks)

(c)

(i) The accounting principle of consistency must be applied. (1) It is unacceptable fordepreciation methods or rates to be changed merely to manipulate profit. It would be

possible to change the method permanently, (1) if there was a clear rationale for the

change. (1)

(ii) The principle of historic cost must be applied. (1)Property may be revalued from time to

time but increased values cannot be recorded in the Profit and Loss Account (1) until

after the profit is realised (1)and there is a profit on the sale.(1)


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SECTION B

Question 4

(a) Errors of commission. Although an error is made, the entry is in the same class of account in

the ledger, eg in the wrong debtors or creditors account. The error is not revealed by the trial

balance. (1)

Errors in principle. The entry is in the wrong class of account, eg capital purchase in the

nominal ledger accounts. The error is not revealed by the balancing of the trial balance. (1)

(2 marks)(b)

Dr Cr

Motor vehicles 5 200

Purchases 5 200

D Cross 800 B Crosswell 800

Suspense 300

Discount received 300

Suspense 90

Purchases 90

Discount allowed 194 Suspense 194

Trading account 312 Stock 312

18 x = (9 marks)

(c) Adjusted Net Profit for the year ended 31 July 2003

Draft net profit 47 600

Add

Purchase of motor vehicle Item 1 5 200 Discount received Item 3 300

Purchases Item 4 90 5 590

53 190

Less

Discount allowed Item 5 194

Stocktake sheet Item 6 312 506

Adjusted net profit 52 684

10 x = (5 marks)

(Total 16 marks)


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Question 5

(a)

(i)

Repair staff 16 000 Health insurance 1 280

17 280

Divided by 1 152 hrs per annum = 15.00 per hour

Required profit 1.50 per hour =16.50 per hour required rate.

(ii)

Depreciation 2 000

Maintenance costs 480

Insurance 180

Fuel costs 1 500

4 160

Divided by 20 000 kilometres

=0.208 per kilometre

16 x = (8 marks)(b)

The cost per labour hour is insufficient(1)for current cost levels or utilisation.

The cost per kilometre adequate(1)to recover current cost levels.

(2 marks)(c)

(i) Higher output.Reduced supervision.

Greater cost effectiveness.

(1 mark per point, maximum 2 marks)

(ii) Piecework is normally associated with repetitive work. (1)As building repair work is

unlikely to have a repetitive nature (1)it is unlikely to be suited to piecework

remuneration. (1) With building repair work, quality will be an issue and therefore

day rate would be a more appropriate way of remunerating workers.(1)

(6 marks)

(Total 16 marks)


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Question 7

(a) Expenses are allocated to a department where they are exclusively attributable to thatdepartment to the exclusion of other departments. (1)Example. (1)

(2 marks)(b)

Machining Assembly Finishing

Rent and rates 5 500 3 300 4 400

Depreciation 30 000 12 000 18 000 Supervisors salary 12 000 12 000 6 000

Insurance 7 500 3 000 4 500

55 000 30 300 32 900

Employees hours 10 800 10 800 5 400

12 x = ( 6 marks)

(c) Hourly recovery rate 5.09 OF 2.81 OF 6.09 OF

per hour per hour per hour

(3 marks)

(d)

(i) Productive departments - overheads can be directly recovered from each hour of

service from that department.(1)

Service departments - serve productive departments (1), their costs must bere-apportioned to productive departments using the most appropriate basis.

(ii) The business will recover the service departments costs by re-apportioning their costs to

the productive departments using the most appropriate basis. (1)This may be number of

employees in the case of canteen costs, maintenance jobs or hours in the case of

maintenance repairs. (1) When re-apportioned, the total cost of the productive department

and the proportion of the service department will be totalled and divided by the labour or

machine hours (1)for that department.

(5 marks)

(Total 16 marks)


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SECTION A

Answer TWO questions from this section

1. The balance sheets of Limsol Ltd as at 31 October 2003 and 31 October 2002 were as follows:

31October 2003 31October 2002

Fixed assets (Net) 900 000 720 000

Current assets

Stock 127 500 133 500

Debtors 79 500 102 000Bank 27 000 49 500

234 000 285 000

Creditors: due within one year

Creditors 117 000 78 000

Proposed dividends 37 500 30 000

154 500 79 500 108 000 177 000

979 500 897 000

Creditors: due after one year

10% Debentures 195 000 90 000

784 500 807 000

Issued share capital

750 000 ordinary shares of 1 each 750 000 600 000

ReservesShare premium - 150 000

General reserve 7 500 -

Profit and loss 27 000 57 000

784 500 807 000


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Additional Information:

(i) During the year ended 31 October 2003, fixed assets with a net book value of30 000 were sold for 37 500 and fixed assets costing 300 000 were purchased.

(ii) An issue of one bonus share for every four shares held was made on

30 June 2003.

(iii) To improve the working capital position the directors sanctioned a further

issue of debentures on 1 November 2002.

(iv) An interim dividend of 15 000 was paid on 31 May 2003.

Required:

(a) Prepare a statement reconciling operating profit to net cash inflow or outflow fromoperations.

(13)

(b) Prepare a cash flow statement for Limsol Ltd for the year ended 31 October 2003 in

accordance with the requirements of FRS 1.

(9)

(c) The management of cash flow is more important than profitability to ensure thesurvival of a business. Explain this statement.

(4)

(Total 26 marks)


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2. The balance sheets of Rumba Ltd and Samba Ltd at 31 July 2003 were as follows:

Rumba Ltd Samba LtdFixed assets

Premises at cost 240 000 144 000

Vehicles at net book value - 37 050

Machinery at net book value 93 750

333 750

-

181 050

Current asssets

Stock 29 625 15 675

Debtors 31 050 14 280

Bank 28 950

89 625

7 455

37 410

Current liabilitiesCreditors

Working capital

Financed by:

50 250

39 375

373 125

43 680

(6 270)

174 780

Ordinary shares of 1 each 225 000 135 000

Share Premium 27 000 -

Profit & Loss 121 125 39 780

373125 174 780

On 1 August 2003 Combo Ltd was formed, with an authorised capital of 750 000 ordinary

shares of 1 each, to take over the assets and liabilities of both companies at book value with

the exception of:

(i) The premises of Rumba Ltd were revalued at 300 000, and Samba Ltd at 180 000.

(ii) The net realisable value of the stock of Rumba Ltd was 27 750.

(iii) Debtors in the sales ledger of Samba Ltd, valued at 480, were

written off.

(iv) Vehicles were adjusted to their part exchange value, 33 750.

(v) Machinery was reduced in value by 12%.

(vi) Goodwill was valued at 10% of the total of the last three years net profits:


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3. The directors of Kaslan Ltd are considering investing in one of two machines to increase

production capacity. The details are as follows:

Machine Y Machine Z

Capital cost 300 000 300 000

Estimated net profit:

Year 1 120 000 45 000

Year 2 140 000 75 000

Year 3 60 000 180 000

Year 4 30 000 135 000

The estimated profit is calculated after deducting straight-line depreciation.

Both machines will have a life of four years and an estimated scrap value of 60 000.

The cost of capital is 15%.

Present value of 1

Year 15%

1 0.8702 0.7563 0.658Q 0.572

All costs and revenues occur at the end of each year.

Required:

(a) Calculate, for both machines, the:

(i) cash flows

(6)(ii) pay back period

(4)(iii) net present values.

(8)


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(b) Using your answer to (a), state with reasons, which machine you would recommendthe directors of Kaslan Ltd to purchase.

(5)

(c) The accounting rate of return method of investment appraisal has one advantage, it issimple to calculate. State threedisadvantages.

(3)

(Total 26 marks)


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SECTION B

Answer THREE questions from this section

4. Dynamic Ltd has an authorised capital of 100 000 ordinary shares of 1 each whichhad been issued in full. In accordance with the required procedures the authorised

capital was increased to 200 000 shares. The directors decided to issue to the public

a further 75 000 shares as follows:

Application 0.30

Allotment (Including premium) 0.70

First and Final Call 0.50

Applications were received for 112 500 shares. Applications for 15 000 shares wererejected and the monies refunded. The 75 000 shares were alloted on a pro-rata

basis, the surplus application money was applied to the amount due on allotment.

The total due on allotment was received in full. The amount due on the first and final

call was also received in full.

Required:

(a) Show the ledger accounts to record the above transactions. (A bank account

is notrequired).

(10)

(b) Give three advantages to a company and its shareholders of making a rights

issue.

(6)

(Total 16 marks)


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5. Patel Ltd manufactures three products, X, Y and Z.

The standard time for each unit produced is:

X 12 hoursY 9 hours

Z 16 hours

Labour details:

Actual direct labour hours worked 9 251.

Standard hourly rate of pay 6.

Actual wages 55 320.

During August the actual output was:

X 320 units

Y 260 units

Z 180 units

Required:

(a) Calculate the standard hours of actual output.(2)

(b) Calculate the following variances:

(i) Total direct labour variance.

(ii) Direct labour rate variance.

(iii) Direct labour efficiency variance.(10)

(c) Give twopossible causes for the:

(i) labour rate variance;

(ii) labour efficiency variance.

(4)

(Total 16 marks)


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6.Curium Ltd produces a single product. The details are as follows:

Direct material per unit - 3 kgs of Alpha @ 3.75 per kg

4 kgs of Beta @ 2.50 per kg

Direct labour per unit - Processing 3 hours @ 5.40 per hour

Finishing 1 hour @ 4.50 per hour

Salesmens commission per unit sold - 0.15

Fixed costs are 410 500

The selling price per unit is 52.10

Required:

(a)Calculate the:

(i) contribution per unit;

(ii) net profit or loss if 72 000 units are produced and sold;

(iii) break-even point in units;

(iv) contribution to sales ratio correct to one decimal place.(10)

(b)Calculate the break-even point in sales value if fixed costs are increased by 21 500.(2)

(c)(i) Explain the term margin of safety.

(ii) Calculate the margin of safety if 72 000 units are produced and sold.

(4)

(Total 16 marks)


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7. The following information relates to Vincent plc for the year ending 30 September

2003:

80 000 ordinary shares of 1 each 80 000

20 000 5% preference shares of 1 each 20 000Operating profit for the financial year 21 000

Market price per ordinary share 4

Proposed ordinary dividend per share 0.10

Required:

(a) Calculate the:

(i) earnings per share

(ii) price earnings ratio

(iii) dividend yield

(iv) dividend cover

(12)

(b) Explain the importance of the price earnings ratio.(4)

(Total 16 marks)


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(c)

Cash is required for the day to day running of the business, ie paying creditors and expenses.

Cash is also required to invest in fixed assets if a commitment to external financing is to be

avoided or minimised.

(2)

Profit is an abstract time related measure of performance derived by the application of rules

and procedures known as generally accepted accounting principles. A profitable activity

may only generate cash in the medium/long term.

(2)

Other valid points:

eg cash is required to meet long term commitments such as repayment of loans

In the long run fixed costs and variable costs must be covered.

(4 marks)

(Total 26 marks)


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Question 3 (a) Depreciation - (300 000 - 60 000)

4

= 60 000 per annum

Thus, 60 000 to be added to profits to obtain the cash flows:

Machine Y Machine Z

Cash Flows Year1 180 000 105 000

Year 2 200 000 135 000

Year 3 120 000 240 000 Year 4 90 000 195 000

(12 x =6 marks)

OFPayback Y = 1 + 120 000 = 1.6 years OF

200 000

OF

OF Z = 2 + 60 000 = 2.25 years OF

240 000

OF

(8 x = 4 marks)Net Present Value

Year Cash

Flow

Cash Flow Factor PV PV

Y Z Y Z

0 --- ---- (300 000) (300 000)

1 180 000 OF 105 000 OF 0.870 156 600 OF 91 350 OF 2 200 000 OF 135 000 OF 0.756 151 200 OF 102 060 OF 3 120 000 OF 240 000 OF 0.658 78 960 OF 157 920 OF

4 150 000 OF 255 000 OF 0.572 85 800 OF 145 860 OF

NPV 172 560 197 190

(OF) (OF)

16 x= (8 marks)

Working:90 000 + 60 000 = 150 000

195 000 + 60 000 = 255 000


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(b) Both machines are acceptable, i.e. both have a positive NPV. (1)

Based on NPV Machine Z should be purchased it has the higher NPV. (2) (1 OF)

If the directors are risk averse, Machine Y should be purchased

as it has a shorter pay back period. (0 to 2)

(5 marks)

(c) Disadvantages:

Different definitions of ARR.

No generally accepted method of calculating ARR.

It takes no account of the time value of money.

Cash flow is the crucial factor in investment appraisal. The ARR uses profitswhich have subjective elements and is not appropriate for investment decisions.

The timing of cash movement is ignored.

The incidence of profits over time are ignored; averages can be misleading.

(3 x 1 = 3 marks)

(Total 26 marks)


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SECTION B

Question 4

(a)

Application and Allotment

Bank 4 500 Bank

(15 000 x 0.30) (112 500 x 0.3) 33 750

Share Premium 37 500 Bank

Share Capital 37 500 (75 000 x 0.7) (6 750) W1 45 750 See W179 500 79 500

W1(112 500 x 0.3) (15 000 x 0.3) = 29 250

(75 000 x 0.3) = 22 500

29 250 22 500 = 6 750

OF OF OF

Share Premium

Application &

Allotment

37 500

Ordinary Share Capital

Balance c/d 175 000 OF Balance 100 000

Application &

Allotment

37 500 OF

First & Final Call 37 500 OF

175 000 175 000 OF

Balance b/d 175 000 OF

First & Final Call

Share Capital 37 500 Bank (75 000 x 0.50) 37 500

20 x =(10 marks)


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(b)

(i) A rights issue to existing shareholders is at a lower cost to the company than apublic issue.

(ii) Existing shareholders may be encouraged to invest as the price per share will beless than the current market price.

(iii) If shareholders do not take up their rights they can be sold to a third party thus,in effect, reducing the value of the shareholders investment.

(iv) Although a rights issue will initially dilute the market value of the share normallyrecovers reflecting the markets view of the future prospects of the company.

Thus, an investors potential of capital gains will not, normally, be put at risk.

(3 x 0 to 2 = 6 marks)

(Total 16 marks)

Question 5

(a) Standard Hours of Actual Output

X 320 x 12 = 3 840

Y 260 x 9 = 2 340

Z 180 x 16 = 2 880

9 060

4 x =(2 Marks)

(b) Variances

(i) SH x SR 9060 x 6 54360

Actual Wages 55320

Total Variance 960 Adverse

(ii)

AH x SR 9251 x 6 55506

Actual Wages 55320

186 Favourable

(iii) (SH AH) x SR

(9060 9251) x 6 = 1146 Adverse

20 x = (10 marks)

(c) Rate

Overtime

Increase in rate of pay

Standard of Employees

2 points x 2 marks


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Efficiency

Quality of materials

Machine breakdown

Poor supervision

(Other valid points accepted)

2 points x 2 marks

(4 marks) (Total 16 marks)

Question 6

(a) (i)

Selling price per unit 52.10 Less: Variable cost per unit

Material (3 x 3.75) + (4 x 2.50) 21.25

Labour (3 x 5.40) + (1 X 4.50) 20.70

Commission per unit 0.15 42.10

Contribution per unit 10.00 OF

(ii) OF

72 000 x (52.10 - 42.10) - 410 500

= 309 500

(iii)

410 500 = 41050 Units

10

(iv) 10.00 x 100 = 19.2%

52.10

20 x = (10 marks)

(b) 410 500 + 21 500 x 52.10

10

= 2 250 720

4 x = (2 marks)


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(c) (i)The excess by which actual sales exceed break even sales. 2 marks(ii)Sales could be reduced in part (a) above by

1 612 495 (30 950 Units x 52.10) before losses start

to be incurred. 2 marks

(4 marks)

(Total 16 marks)

Question 7

(a) (i) Earning per share

20 000 (W1)= 25 Pence per share

80 000

Operating profit for the financial year 21 000

W1 Less: Preference Dividend 1 000

Profit attributable to equity shares 20 000

(ii) Price/Earnings

4.00 = 16 25 pence

(iii) Dividend yield

0.10 x 100 = 2.5%

4.00

(iv) Dividend cover

20 000 = 2.5 Times

8 000 24 x = (12 marks)

(b) The ratio indicates the number of years it would take to recover

the share price out of the current earnings of the company.

This means that if 4 is paid for the shares, then 16 years of current

earnings of 25 pence per share are being sought.

(4 marks) (Total 16 marks)


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ASSESSMENT GRID

Question AO1marks AO2marks AO3marks AO4marks

1a) 4 4 3 2

b) 2 2 3 2

c) 2 2

2a) 3 3 3 2

b) 3 3 3 2

c) 2 2

3 a) 3 7 6 2

b) 5

c) 3

4a) 3 4 3

b) 4 2

5a) 2 b) 4 4 2

c) 4

6a) 4 4 2

b) 1 1

c) 2 1 1

7 a) 6 6

b) 2 2

TOTAL 31 43 39 29

Specimen Paper % 23 30 27 20Specification % 24 30 24 22


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